The October Curse: History's Little Trick Worries Investors

Sydney Morning Herald

Saturday October 17, 1998

LACHLAN JOHNSTON

It is referred to as the "October syndrome" - the arrival of the month that has hosted the sharemarket's two official "crashes" and a range of steep corrections.

It puts investors on edge and doomsayers into overdrive.

This month, as with other Octobers, brokers are reporting an increased number of investors taking "crash insurance" - put options over Australia's All Ordinaries index or the New York Stock Exchange's Standard & Poor's index.

But analysts say that while October has the worst average performance of all months, the figures are distorted by the two years in which the irregular event of a crash occurred.

In the past 11 years the Australian sharemarket has had two major flops in October, a 25 per cent fall on the 20th in 1987, and last year's 144-point drop. "Black Friday" in 1929 was on October 29.

But, says Morgan Stockbroking strategist, Mr Michael Knox, in the decade after the 1987 crash, the All Ordinaries index fell five times and rose five in the months of October.

"There is nothing special about October, it is just a time in people's minds, like Christmas," he said. "Based on the evidence of the past decade, fear of October appears no more rational than a fear of the dark."

Mr Knox's research shows the average percentage movement of the past 10 Octobers, including last year when the market fell 10.9 per cent, has been a 0.4 per cent rise. In most charts, these numbers have been distorted by the market's 42 per cent fall in October 1987.

He said October's only lasting economic significance was that it marked the movement of the northern hemisphere summer to winter. This historically boosted commodity prices, as households and business build up inventories for winter.

Rising commodity prices in turn led to a rise in bond yields (a fall in prices), which undermined the sharemarket.

"But as you can see, the one thing we don't have this year is a commodity price boom," Mr Knox said. "And with the cut in US interest rates, we certainly aren't about to see bond yields rise through the roof."

ANZ Securities' strategist, Mr Rob Prugue, said the syndrome could not be plausibly explained by economics but was a "behavioural finance" issue.

"I could think of hundreds of reasons why October alone should have the biggest falls but I could think of the same amount of reasons why it shouldn't.

"Since 1920, October has had the worst monthly average performances but is that statistically significant enough for us to advise clients to arbitrage their way through it? No."

In terms of the historical theories, one fund manager said fate was against a crash this year - they tended to come in pairs, two years apart.

"The 1929 crash was followed by big falls two years later, the 1987 crash followed by a mini-crash in 1989. I don't necessarily believe the theory, but it appears to be on our side this year," he said.

A correction was more likely.

"The market is still 18 per cent above its long-term [30-year] trend. Long-term trend would place the market somewhere around 2000 points. There is definitely room for it to go down."